No-Class-Action Provisions in Five Agreements' Arbitration Provisions Are Unenforceable
as Unconscionable Despite U.S. Supreme Court and Eleventh Circuit Precedent
By Louis M. Solomon
In re Checking Account Overdraft
Litigation, MDL No. 2036 (S. D. Fla. Sept.
2011) [enhanced version available to lexis.com subscribers], decides renewed motions to compel arbitration of
nationwide class-action litigation consolidated for multidistrict
litigation purposes in South Florida. The Court denies again the motions
to compel arbitration. The international litigation issues in the case
are similar to those in Cruz, et al. v. Cingular Wireless, LLC, No.
08-16080 (11th Cir. Aug. 2011) [enhanced version / unenhanced version available from lexisONE Free Case Law],which is among the first Court of Appeals decisions since
the U.S. Supreme Court's decision in AT&T Mobility LLC (ATTM) v.
Conception, 131 S.Ct. 1740 (2011) [enhanced version / unenhanced version ], which addressed the issue whether a state
law imposing limits on a contracting party's ability to prevent class actions
in arbitration was preempted by federal law. We have posted on these
topics (Conception here, and Cruz here).
The claims in the current MDL
litigation raise claims under the laws of four states: North Carolina,
South Carolina, Maryland, and Georgia. The Court understood the issue
before it to be whether the Savings Clause in the Federal Arbitration Act
permitted it to find the arbitration provisions unconscionable under state law
and hence not enforceable. In analyzing AT&T and Cruz, the
Court found that the agreements in those two cases were identical to each other
but were substantively and, in the Court's view, dispositively different from
the agreements before it. In the Supreme Court and Eleventh Circuit
cases, said the District Court, the arbitration agreements were "extremely
consumer-friendly" and "aggrieved customers who filed claims would be
essentially guaranteed to be made whole". Relevant to the Courts in
the other cases was that the Company was not permitted to seek or was
restricted with respect to seeking attorneys' fees, and the claimant could
proceed in his own county, could proceed by telephone or based solely on submissions,
and the arbitrator could afford any form of individual relief.
In the case before it, however, the
Court addressed the kind of different facts, which we adverted to in our
recent posting on possible limits to federal policy favoring arbitration
(i.e., freedom of contract philosophies) preempting state law consumer
protection doctrines. The MDL Court found that the controlling
cases "did not completely do away with unconscionability as a defense to the
enforcement of arbitration agreements under the FAA" but instead read the
Savings Clause to permit invalidation by generally applicable defenses but not
"defenses that apply only to arbitration or that derive their meaning from the
fact that an agreement to arbitrate is at issue" (quoting Conception). In
the four agreements at issue in the MDL litigation, the Court found that
provisions permitting the prevailing party to recover attorneys' fees - either
mutual provisions or one-way (in favor of the bank) - were the single provision
relied upon for the finding of unconscionability. The District
Court, however, did not determine that any contract with such a provision would
be unconscionable. Did the controlling precedent require it to do
so? Is the reason the fee shifting provision was dispositively bad here
because it was in the context of an arbitration? Was reliance on this
provision effectively reliance precisely on a "defense that appl[ied] only to
arbitration or that derive[d] their meaning from the fact that an agreement to
arbitrate is at issue"?
Finally, each of the four agreements
included severability clauses that specifically gave the Court the right to
sever provisions (such as the fee-shifting agreement) if found
unenforceable. The MDL Court found that the defendants had waived the
right to rely on the severability provision by not raising it in their initial
International Practice Law Blog for more analysis of international and
foreign law issues.
For more information about LexisNexis products and solutions connect with
us through our corporate site.